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A Chat With Cirrus Logic CEO Jason Rhode

The Fool sits down with one of Apple's key suppliers.

In late 2010 I was able to chat withCirrus Logic's (Nasdaq: CRUS) CEO Jason Rhode. After doing some due diligence on the company and its relationship with key customer Apple(Nasdaq: AAPL), I decided to make the jump and buy shares in the real-money portfolio I manage on Fool.com.

A year and a half later and Cirrus Logic has soared 61%, far outpacing other Apple suppliers and plays across the semiconductor world. I recently had the opportunity to chat with Jason again to get an update on the company after its recent blowout quarter. Following is a lightly edited transcript of our interview. And don't forget to come back to Fool.com to catch up with Part 2 of our chat.

Eric Bleeker: Great to chat with you today, Jason. Last quarter was obviously a huge quarter for the company. Aside from your largest customer, which tends to be a lot of the focus, what are the key opportunities that you guys are really seeing in audio right now? [Note: Cirrus, as with other Apple customers, isn't supposed to talk about its relationship with Apple, so the company only refers to its "largest customer" in conference calls and other investor-relations settings]

Jason Rhode: Well, it was really cool to see some meaningful shipments of our first portable audio DSP. We launched that thing a while back, and that really brings an unbelievable level of processing power at a fairly low electrical power level, so it enables us to attack opportunities like noise cancellation, echo cancellation, noise suppression, things like that. We think those are functions that are just going to be ubiquitous in the future -- everything from talking to your coffeemaker to your TV set or you name it, so to see that device start to get some shipments in camcorders … we got a design win last summer where we were shipping it in a Vizio tablet. Tablets are a challenge because not everybody that makes one ends up shipping a lot of volume, but the function that we provide is valuable nonetheless.

We think those are probably some of the bigger opportunities in audio. We have also invested heavily in automotive, and we have seen our new chipset there for automotive amplifiers really starting to ship in meaningful lines now as well. So those are kind of some of the bigger opportunities in audio.

Bleeker: You are kind of at the forefront of the idea of infotainment. We see Ford(NYSE: F) Sync obviously being in a lot of cars. There's huge integration between cars and the smartphone inside. You obviously have a pretty high-content opportunity in cars. How are you seeing demand for a higher-quality audio solution shaping -- as a lot of these cars are, like I said, moving to where they have robust media inside?

Rhode: Well, we have certainly seen a lot more focus on providing a rich entertainment experience in the car, and in particular the trend that is interesting is that these features have moved downward in the automaker's lineup. So whereas before you used to only see it in a really premium-quality car, high-end car, now you really see some of these features being available in more entry-level models, which is not surprisingly where the user base is probably going to use them more. So that's a definite good trend from a volume point of view.

As we have moved from providing a simple audio codec in products that we used and still sell, we have now … the amplifier chips that provided a much larger amount of total functionality, so that certainly carries with it a much higher amount of dollars per box.

Bleeker: Sure. So when you talk about moving to the low end of cars, in mobile right now, I think on Qualcomm's (Nasdaq: QCOM) conference call yesterday they said "China" like 20 times. Do you see that moving all the way down, because that's where the growth in the automotive segment is? Do you see [car infotainment offerings] moving all the way down to automobiles in China and other emerging markets, where you could really see that addressable market expand?

Rhode: I certainly think that's a possibility. We haven't capitalized on any of that yet, but I think that's a definite good probability in the future.

Bleeker: So kind of pivoting, you already mentioned tablets earlier. … There's only one company selling tablets right now, and Amazon.com(Nasdaq: AMZN), which is kind of the No. 2, is kind of treating hardware like a commodity, and it definitely wasn't focused on having great hardware in the first-generation Kindle Fire. Do you still see the same level of opportunity in tablets, or are you kind of refocusing on other areas on the audio side?

Rhode: Well, we are currently very pleased to be in the incumbent tablet suppliers, so that's helpful. Broadly speaking, on the tablet opportunities that are out there, we have some very good catalog products out there in terms of the DSP and a very relevant low-power audio codec, and so the incremental cost for us to support people that are designing with those is really pretty minimal. You always have to be careful in the marketplace when you think you know more than your customers do, because sometimes you never know where that next great idea is going to come out of.

Like I said, our approach is to make sure we have got the appropriate catalog products out there, and that enables us to support a broad range of folks and not have to predetermine the winner. If we are going to do a custom product for somebody, it costs us typically $3 million to $5 million, so it has to be a really pretty good opportunity to engage at that level. Those are, as you mentioned, rare in tablets right now.

Bleeker: What about on the smartphone side -- other opportunities, aside from established customers?

Rhode: Sure. We have got some new opportunities there. it's a little early to take the wraps off of that, but we have had to think about new value we can provide in addition to just typical measures of audio quality, such as signal-to-noise ratio or distortion performance, because frankly there aren't that many people that are making a phone that are willing to spend the money to differentiate on those types of performance measures. We think they matter a lot, in particular when you are going to plug your phone into your car, but again, there just aren't that many phone manufacturers that are positioned in a way that enables them to capitalize on it.

So we have expanded the functionality that we provide to include things like echo cancellation or noise suppression, and then also working on some additional functionality that might be of more interest to some additional phone suppliers.

Bleeker: So outside of obviously key customers, you are saying there's not a huge level of interest for some of the products you are working with on the audio side. Do you expect that to hold out into the future?

Rhode: No, I am saying we have had to enhance or expand on what we have offered to make sure that we offer appeal that other manufacturers can differentiate on.

Bleeker: OK, got it.

Rhode: And I think we have got better opportunities to do that now than we have had in the past.

That's it for Part 1 of our interview with Jason Rhode. On Monday we'll pivot from the company's audio segment to take a look at what's happening with its energy products and see how Jason looks at Cirrus' culture as a key advantage for the company. And to make sure you keep getting up-to-date news and analysis on Cirrus Logic, make sure to add the company to our freeMy Watchlistfeature. Fool on!

Eric Bleeker owns shares of Cirrus Logic. The Motley Fool owns shares of Ford, Amazon.com, Cirrus Logic, Apple, and Qualcomm.Motley Fool newsletter serviceshave recommended buying shares of Apple, Ford, and Amazon.com, creating a bull call spread position in Apple, and creating a synthetic long position in Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Author

Eric started at The Motley Fool in 2008 working in the Tech & Telecom sector. Today, he's the General Manager of Fool.com. You can follow him on Twitter to stay up to date with his tech industry analysis. Follow @bleekertech